Over these last few and very volatile weeks, we’ve been talking about the top strategies you can use to capture profits and hedge your risk.
But there’s a key component underlying all of these strategies that we haven’t yet talked about.
Until now…
I’m also going to walk you through the differences between two very common types of trading as well as a unique method to make money in one week, and much more…
Here are Your Six Best Tips to Avoid Early Exercise… and Make the Most of Your Trades
Every month or so, I like to take the biggest questions you’ve been asking and record a training video with all of the answers you need.
But don’t worry, I’ve written out each one below the video, so you can always – and easily – come back to them…
1. I keep hearing the terms “swing trading” and “day trading. What are these, and how are they different?
Swing trading involves creating, or trying to trade, a pattern that evolves over possibly the course of days, weeks, or even longer. As a trader, you’re looking to buy low and sell high. Oscillators sometimes help provide indications of swing trading.
Day trading, very simply put, is when you’re getting into and out of the same position during the same day. Day trading requires different margins as well. You need to have $25,000 or more to be considered a pattern day trader- according to most brokerage firms.
2. What are weekly options exactly, and why would I want to buy these? Where can I look up weekly options if I want to buy them?
These options are just what they sound like. They are options that expire at the end of each week. There’s about 300 to 325 stocks that have weekly options that can go out anywhere from four to six weeks from today’s date.
If you’re more of a trader than an investor, or if you want to take advantage of short-term positions in a choppy market, weekly options can definitely do that. You can look up weekly options at www.cboe.com. When you get there, you’ll want to click on “Products,” then select “Weekly Options.” You can read more about weekly options and what stocks have them:
3. If I’m writing a put AND buying a put, am I at risk for having the person on the other end of the trade “PUT” the stock to me?
In this scenario, you’re both selling a put and buying a put, which have completely different sets of risks. As a buyer, you have rights but not obligations. As a writer (seller), you have obligations. If you write a put option, then someone could put the stock to you – and you’d be long the stock. In order for that to happen, two things need to apply:
- The put options needs to be very close to expiration
- The put option needs to have some real value to the buyer
If both of those happen, then you could end up with long stock. You can avoid that by getting out before expiration or get out of it if it goes too far against you – making it more valuable to the other side of the trade – the buyer.
4. If you’re using the margin on your brokerage account to buy option spreads, would the borrowing costs be lower if you use bull-put spreads instead of call-put spreads?
Bull put spreads are considered credit spreads, and those do come with margin because you’re selling them. Bull call spreads are debit spreads, and those do not come with margin because you’re buying them. There’s risk in each but only risk AND margin for the
Think of this way, buyers of options and debit spreads do not have margin. Sellers of options and credit spreads have margin. So say you’re deciding between a five-point bull put spread and a five-point bull call spread. With the bull put spread, you’ll bring in 2.50, and with the bull call spread, you’ll shell out 2.50 – each are still five-point spreads. So which one is better? The answer is they’re really both the same if they have the same strikes, expirations, risks, and rewards. There may be a slight difference in the commissions, but you can really use either one.
5. Company “A” waits until the NYSE closes to announce poor 3rd-quarter results – only to watch its stock get hammered in AFTER HOURS TRADING. What the heck is after hours trading? Is it a real exchange of some type?
Actually, most – if not all companies- release their earnings before the market opens or after the electronic exchanges (ECNs), practically anyone can trade after hours instead of just institutions. Here’s a look at after hours trading on Cisco Systems Inc. (NASDAQ: CSCO) on www.marketwatch.com.
You’ll see that some stocks trade after hours typically right around earnings. But here are a couple things to take note of when it comes to after hours trading:
- The trading is usually from 4:30 pm to 8:00 pm EST
- After hours trading is not exactly the most liquid place to be because you’re trading against people who typically have a lot more information to work with than you and me – institutions.
However a lot of people use this as stocks traders to get out of a losing position before it gets dumped the next morning on the opening exchanges (the ones that you and I trade) or to take profits early. Bottom line… after hours trading exchanges are real – and there may be a day in which we have a 24-hour market, and not just the markets that are open during standard hours. If this happens, then expect to see the liquidity get spread across a longer time frame.
6. I like debit call and put spreads. Can you explain how I can avoid early assignment? Does a debit spread for an option with a weekly expiration represent more risk of early assignment?
This is similar to question number three… have an exit plan that gets you out before expiration.
The good thing with debit spreads is that if you do get assigned, you probably have something else that’s worth even more – the option you’re long. So if you’re a debit spread trader, I would actually pray for assignment. The reason why is that you’re long the lower and short the higher. If the higher gets assigned, then that means the short can get exercised for a maximum profit. Same thing on a put. Now if you really want to avoid getting assigned, then just get out before expiration, which is when most assignments happen.
If you’re trading weekly options, then you face that risk of early assignment if you don’t get out before expiration. If it’s deep enough in-the- money, then it could be assigned against you…
But keep in mind that if it’s a debit spread – that’s probably a good thing because you can exercise the long and take the maximum profit potential.
Thanks for all of your excellent questions! Keep posting them to the comment boards.
You can also get in on the discussion on Facebook and Twitter.
Until next time…
Tom Gentile
